Beyond Borders: China Opens up to the World

RMB Tracker SPECIAL EDITION June 2019

Beyond borders: China opens up to the world

The effects of globalisation on China and Belt and Road countries Contents

Foreword 3

Executive summary & key insights 4 Part I: China on course for internationalisation 5 1.1. The RMB today 5 1.2. Greater Bay Area vision delights developers, industrialists and investors 6 1.3. The Belt & Road Initiative – What’s next? 7 1.4. Africa – China’s new Eldorado 11 Part II: SWIFT supporting RMB internationalisation 13 2.1. SWIFT global payments innovation (gpi) 14 2.2. Chinese Financial Market Infrastructures (FMI) – Connecting China to the world 14 2.2.1. Cross-Border Inter-Bank Payments System (CIPS) is making a difference 15 2.2.2. Stocks and bonds gaining momentum 16 2.3. Holistic approach helps banks and corporates going global 16 OMFIF Contribution 17

2 Foreword RMB Tracker

China’s re-emergence fuels demand for capital accounts has also been occurring the RMB steadily. China is at the centre of global trade. It accounts for 27% of global manufacturing According to the latest S&P Global Market value added output – close to double (1.7 Intelligence annual rankings, the top four X) the U.S., and almost three times (2.8 X) banks on the planet are from China, and they Japan. However, adoption of the RMB as grew their assets by US$13.8 trillion in 2018 an international settlement currency remains alone. relatively low2.

That growth is not just an indication of China’s Similarities and differences new global status. What we are seeing is the country’s re-emergence as an economic The RMB’s situation today is, in many ways, superpower. reflective of the Yen’s recent experience, even By Alain Raes if the outcome is different. Chief Executive, APAC & EMEA, SWIFT Top trends For example, despite Japan’s economic This can be seen in a few of the key trends importance in the 1980s and 1990s, coupled that are driving China’s development. with efforts by the Japanese government to One is the shift of China’s economy to internationalise the Yen, the currency never consumption and services. Now that imports became a dominant invoicing currency such are playing a larger role, China is expected to as the U.S. dollar. have a greater influence on the currency used, with a preference for the renminbi (RMB). China has other plans for its currency. Another is the emergence of the so-called ‘new economy’ led by BigTech, including SWIFT has seen RMB adoption across companies with aspirations towards global financial institutions continue to grow globally, technology leadership. That increasingly with the number of banks using the currency includes the ‘ABCDs’ of Artificial Intelligence for payments increasing steadily over the (AI), blockchain, cloud and big data. last three years. We are playing an important The new economy is also accelerating China’s part in supporting that growth. This includes already rapid urbanisation by creating jobs providing the connectivity, reach and value- in towns and cities. Today, more than half of added services that financial institutions need China’s population lives in urban areas, which to thrive along the Belt & Road (BRI) and the are rapidly developing into large, influential and Greater Bay Area (GBA) as they rely on our inter-connected mega-cities. One example community engagement and standardisation is the Greater Bay Area in Southern China, to operate efficiently and grow their business. which links the semi-autonomous regions of It will certainly be interesting to see whether Hong Kong and Macau with nine mainland the RMB will be successful in redefining the Chinese mega-cities. dynamics of the international monetary order. In the meantime, I hope that this paper will put Then there is the rise of the middle class. some of the most recent developments into China has lifted approximately 750 million perspective and provide insight into the RMB’s people out of poverty. This middle class likely future. population is expected to reach at least 550 million by 20221. And, as the number of technology and service industry jobs continues to grow, the middle class is increasingly driving consumption and imports. The liberalisation of China’s current and

1 Source: McKinsey, as cited in ‘China’s middle class is exploding’, https://www.businessinsider.com/chinas-middle-class-is-exploding-2016-8/?IR=T , Aug 27, 2016. 2 https://www.bcg.com/publications/2018/china-next-leap-in-manufacturing.asp2 https://www.bcg.com/publications/2018/china-next-leap-in-manufacturing.aspx

3 Executive summary & key insights

China has become a global player, and its Described by President Xi Jinping as ‘the from China to Africa increased by 67.05% in new manufacturing muscle and developing project of the century,’ the BRI is designed Q1 2019 compared with Q1 2016. But, the economic might is steadily transforming the to improve trade routes between Asia, Africa amount of RMB used increased by 53.48%. way the world works. Yet, although its main and Europe, develop new infrastructure and RMB payments from Africa into China have language – Putonghua – is the world’s most facilitate bi-lateral trade arrangements, and also grown. The total across all currencies spoken tongue, its currency still has a long increase China’s global strategic influence. shows a healthy increase of 27.76%. But, way to go before it comes close to matching Whether these plans will achieve their stated during the same period, the proportion of today’s most popular payment tools – the goals remains to be seen. However, they RMB used for payments increased by a U.S. dollar and the Japanese yen. are having an impact. The Chinese General staggering 123.01%3. Customs Administration reports that Chinese RMB internationalisation imports and exports to countries along the BRI reached RMB 16.8 trillion in the first three In April 2019, the RMB’s share of international quarters of 2018 – an increase of 13.2% payments currently sits at 1.88%. Looking at compared to last year. cross-border payments, and excluding intra- Eurozone payments, the figure falls even The BRI is already presenting significant lower to 1.20%. opportunities for Chinese and foreign banks with a presence in BRI countries, and acting The situation is changing, albeit gradually. The as an enabler for RMB internationalisation. 2016 addition of the RMB to the International The number of branches and subsidiaries Monetary Fund’s (IMF) Special Drawing Rights of Chinese banks connected to SWIFT, in (SDR) Basket was a big step. Since then, BRI countries increased by 31% between many central banks have added the RMB to 2014 and 2018. Many of them were opened their mix of reserve currencies. specifically to serve State-Owned Enterprises (SOEs) and Chinese corporates involved in In parallel, the increased use of the RMB BRI infrastructure projects. in trade has helped to make it even more popular. This is particularly true for businesses Payments and trade flows with China involved in importing or exporting Chinese goods, which see advantages, such as There was a surge in payments traffic to and limiting exchange rate risks. The increasing from China with some countries along the availability of offshore RMB funding, which ‘Silk Road Economic Belt’ between 2014 can reduce the cost of borrowing, has also and 2018. For example, Hungary, Turkey and fuelled demand for, and the acceptance of the Uzbekistan saw increases of 242%, 35% and currency. 170% respectively during this period.

Big ideas creating new RMB Over the same period, in South East Asia, opportunities Singapore has experienced payment traffic growth with China of 231%, and Thailand, Nobody could accuse China’s approach Vietnam and Indonesia are also reaping the to expanding its economic power into the benefits of the BRI. global arena as lacking in vision. Not when it includes initiatives like the Greater Bay One of the brightest spots is probably Area (GBA), which aims to unite Hong Kong, Africa, which has been referred to as China’s Macau, Guangzhou, Shenzhen, Zhuhai, new Eldorado. The importance of Africa Foshan, Zhongshan, Dongguan, Huizhou, to China, and vice versa, is visible in the Jiangmen and Zhaoqing, into an integrated way commercial payment volumes have economic and business hub that will rival developed. ‘Silicon Valley’ by 2035. Africa’s adoption of the RMB appears to be Then there is the Belt & Road Initiative (BRI). increasing. The total payments in all currencies

3 All statistics and charts in this report are referenced from SWIFT BI Watch; and are drawn from full-year 2018 data or Q1 2019

4 Part I: China on course for internationalisation RMB Tracker

1.1. The RMB today Analysis of SWIFT transactions shows that in April 2016 the RMB accounted for a 1.82% China’s economy is a phenomenon which has share of international payments currencies. outperformed that of every other country for That puts it in sixth place internationally, decades. It overtook Japan in 2011, and is behind the Canadian dollar, the Japanese yen, now on course to surpass the longstanding the British pound, the euro and the U.S. dollar global leader, the United States, possibly respectively. This position has not changed as soon as 20204 according to a report by dramatically in the intervening two years. Standard Chartered Bank. Although figures for April 2019 show that the RMB has moved up one slot to replace However, so far that incredible growth has not the Canadian dollar in fifth place, its share as paved the way to an equally dramatic an international payments currency remains increase in the use of the Chinese RMB as an at just 1.88%. When excluding intra-flows international payments currency. within the Euro zone, the RMB’s share is even smaller, representing just 1.20%.

RMB’s share as an international payments currency Customer initiated and institutional payments. Messages exchanged on SWIFT. Based on value. April 2016 April 2019

1 USD 41.92% 1 USD 40.76% 2 EUR 30.69% 2 EUR 33.16% 3 GBP 8.40% 3 GBP 7.11% 4 JPY 3.24% 4 JPY 3.47% 5 CAD 1.83% 5 CNY 1.88% 6 CNY 1.82% 6 CAD 1.84% 7 AUD 1.56% 7 HKD 1.61% 8 CHF 1.50% 8 AUD 1.38% 9 SEK 1.09% 9 SGD 1.13% 10 HKD 1.06% 10 THB 0.97% 11 SGD 0.97% 11 CHF 0.91% 12 THB 0.94% 12 SEK 0.86% 13 NOK 0.73% 13 NOK 0.64% 14 PLN 0.57% 14 PLN 0.52% 15 ZAR 0.46% 15 MYR 0.46% 16 DKK 0.44% 16 DKK 0.41% 17 NZD 0.36% 17 ZAR 0.40% 18 MXN 0.34% 18 NZD 0.34% 19 TRY 0.29% 19 MXN 0.25% 20 CLP 0.21% 20 NZD 0.23% Source: Watch Powered by SWIFT BI RMB’s share as an international payments currency – Excluding payments within Eurozone Customer initiated and institutional payments. Excluding payments within Eurozone. Messages exchanged on SWIFT. Based on value. April 2016 April 2019

1 USD 46.25% 1 USD 47.02% 2 EUR 30.64% 2 EUR 31.72% 3 JPY 4.27% 3 JPY 4.19% 4 GBP 4.25% 4 GBP 4.11% 5 CHF 2.59% 5 CAD 2.34% 6 CAD 2.48% 6 CHF 1.51% 7 AUD 1.62% 7 AUD 1.36% 8 CNY 1.31% 8 CNY 1.20% 9 SEK 0.83% 9 HKD 1.10% 10 HKD 0.80% 10 SEK 0.74% 11 NOK 0.57% 11 NOK 0.53% 4 12 MXN 0.52% 12 SGD 0.50% Source: McKinsey, as cited in ‘China’s middle 13 TRY 0.51% 13 DKK 0.44% class is exploding’, https://www.businessinsider. 14 DKK 0.49% 14 NZD 0.43% com/chinas-middle-class-is-exploding-2016- 15 NZD 0.45% 15 MXN 0.37% 8/?IR=T , Aug 27, 2016. 16 SGD 0.44% 16 PLN 0.36% 17 PLN 0.43% 17 TRY 0.29% 18 ZAR 0.27% 18 RUB 0.28% 19 RUB 0.20% 19 ZAR 0.26% 20 CZK 0.18% 20 CZK 0.22% Source: Watch Powered by SWIFT BI 5 Part I: China on course for internationalisation (continued)

Defining internationalisation 1.2. Greater Bay Area vision delights Roadmap to the future developers, industrialists and investors What does internationalisation mean? In That said, some critics have described simple terms, any currency that is used In 2017, the Chinese government laid out its the GBA plan as long on vision but limited offshore for trade and investment can be ambitious concept for the Greater Bay Area on details. Some of those criticisms were described as ‘international’. The real question (GBA) in its 13th Five-Year Plan. addressed in February 2018, when Chinese is whether the currency is accepted by policymakers unveiled the long-awaited enough organisations and institutions to make The GBA is more than a map. It is an idea ‘Greater Bay Area’ blueprint, which was a significant impact in world markets. designed to take some of the most vibrant much anticipated by real estate developers, socioeconomic regions in Southern China to industrialists and investors. China’s government has been promoting the a new level of development through intense internationalisation of the RMB for a variety collaboration and cooperation. The GBA Once the physical integration is complete, of reasons. One of them is because an includes the cities of Hong Kong, Macau, the GBA will be ready to deliver on other internationally recognised currency represents Guangzhou, Shenzhen, Zhuhai, Foshan, pieces of the initiative – adding capabilities, a tacit seal of approval for the country’s Zhongshan, Dongguan, Huizhou, Jiangmen increasing the value of the Chinese economy markets, institutions and policies. and Zhaoqing, which will become part of an and boosting internationalisation. These are all integrated economic and business hub. important engines that will drive the next stage Indeed, the International Monetary Fund’s of China’s economic development. 2016 addition of the RMB to its Special A new Silicon Valley Drawing Rights (SDR) represented a huge step for the currency. The decision to include The ultimate goal of the GBA is to establish the RMB alongside the four existing SDR something comparable to the San Francisco currencies – the U.S. dollar, the euro, the Bay Area. The intention is to build the GBA Japanese yen, and the United Kingdom’s into a highly integrated and connected pound – was regarded as an important economy, with efficient flows of all sorts milestone for both the IMF and China, as well of resources, including capital, goods and as recognition of China’s continuing progress human resources. Most importantly, the GBA on economic reforms. economy will be driven by technology and innovations, with the goal of rivalling ‘Silicon There are also practical and economic Valley’ by 2035. advantages to internationalisation. For example, the increased use of the RMB as One of the first fruits of the GBA initiative a trade mechanism is convenient for China’s was the October 2018 opening of the Hong exporters and importers, and poses less Kong–Zhuhai–Macao Bridge – a 55-kilometre exchange rate risks. It can even reduce the bridge–tunnel system consisting of three cost of borrowing through access to offshore cable-stayed bridges, a 6.7 kilometre sources of RMB funding – what is sometimes undersea tunnel, and four artificial islands. It called the ‘dim sum’ market. is the longest open-sea fixed link on earth. What’s more, built at a cost of more than RMB RMB reserves are up, but global payment 127 billion (US$18.8 billion), and designed value is lagging to last 120 years, it is a testament to the anticipated longevity of the GBA initiative. Certainly, more central banks are now using the RMB for their reserves, which is a Another example of increasing GBA good indicator of the currency’s increasing integration is the Express Rail Link. Also acceptance. However, despite the obvious opened in 2018, it now connects Hong Kong importance of China as a global economic to Shenzhen, and Guangdong with China’s power, the use of the RMB as an international extensive high-speed rail network. commercial currency is still lagging. A third project – the Shenzhen-Zhongshan Corridor – is expected to be finished by 2024. The eight-lane superhighway will reduce travel time between Shenzhen, Zhongshan and Jiangmen by about 30 minutes.

6 RMB Tracker

1.3. The Belt & Road – what’s next? China’s emerging global financial integration China’s ambitious Belt & Road has been making international headlines since it was China’s financial integration with the rest of launched in 2013. And for good reason. The the world, and increasing activities across huge project, which is designed to improve BRI markets, will result in more Chinese trade routes between Asia, Africa and Europe, banks expanding into them. That means the involves infrastructure developments and bi- incorporation of new businesses supported lateral trade arrangements aimed at increasing by capital investments and, eventually, new China’s global strategic influence. In fact, commercial and trade flows supported by China’s President Xi Jinping has called the BRI cross-border payment settlements. the project of the century, and said that ‘The plan is to lead the new globalisation 2.0.’ Some of this is already happening. The number of branches and subsidiaries of Time will tell whether he is correct. However, Chinese banks connected to SWIFT in BRI the initiative addresses China’s industrial countries increased by 31% between 2014 over-capacity and facilitates trade with-and- and 2018. Many of these were opened between participating countries, while at the to serve State-Owned Enterprises (SOEs) same time strengthening China’s diplomatic and Chinese corporates involved in BRI relations. It also presents strong potential for infrastructure projects. financial institutions.

Meeting the financial needs of corporates for advisory services and financing offers substantial opportunities for Chinese and foreign banks with a local presence in BRI countries. It also has significant potential as an enabler of RMB internationalisation.

Expansion of Chinese banks in the BRI countries Evolution on the number of branches of banks connected to SWIFT headquartered in China FY 2018 vs FY 2014

2014 2018 Source: Watch - Powered by SWIFT BI

Note to the reader For the purposes of analysis the list of countries comprising Belt and Road markets is based on the World Bank list http://documents.worldbank.org/curated/en/984921545241288569/pdf/133112-BRI-MTI-Practice-Note-6-Final.pdf

7 Part I: China on course for internationalisation (continued)

Growing capital flows between China and BRI countries

In 2016, China became the world’s second- largest source of outward foreign direct investment (FDI) after the United States. The country continues to invest in less-developed countries, where it ranks ahead of France and the United States5.

Although the BRI officially covers more than 65 countries, China’s trade and investment links are currently concentrated in a relatively small number. Indeed, in the first quarter of 2018 just ten countries, led by Vietnam, Malaysia, Russia, Indonesia and Thailand, accounted for 66.4% of China’s BRI export flows and 73.3% of its import flows. Most of China’s FDI flows to the BRI also involve a small number of markets, most notably Singapore, Malaysia, Indonesia and Vietnam6.

There has also been a surge in the growth of payments traffic along the ‘Silk Road Economic belt’ between 2014 and 2018. For example, Hungary, Turkey and Uzbekistan have enjoyed increases of 242%, 35% and 170% respectively, according to SWIFT data.

In South East Asia, Singapore has experienced payment traffic growth with China of 231% and Thailand, Vietnam and Indonesia are also reaping benefits from the BRI. However, at the other end of the spectrum, some South East Asian countries, such as Malaysia and the Philippines, have seen falls of 10% and 37%.

5 Report jointly released by the United Nations Conference on Trade and Development (UNCTAD) and the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce - http://www.xinhuanet.com//english/2017-06/08/c_136350164.htm 6 http://country.eiu.com/article.aspx?articleid=626742246&Country=China&topic=Economy

8 RMB Tracker

Payments flows along the Belt & Road countries Live and delivered, international MT 103 and 202, by value between China and Belt and road countries All currencies, excluding central banks traffic

Poland, +441%

Czechia, +221% Ukraine, +79%

Kazakhstan, -2% Mongolia, +16%

Hungary, +242% Romania, +29%

Bulgaria, +95% Turkey, +35% Uzbekistan, +170% Beijing S ilk R o a d

Greece, -26% Iran, +38% Israel, +61% Kuwait, +57% Pakistan, +0% China Jordan,-4% Bahrain, +102% Bangladesh, +453% Egypt, +107% Laos, +11% Hong Kong, +92% UAE, +29% Qatar, +49% Saudi Arabia, +51% Thailand, +35% Vietnam, +301%

India, +106% Philippines, -37% Cambodia, +39% Malaysia, -10% Kenya, +74% Sri Lanka, +137% Singapore, +231%

d a Indonesia, +58% o R M a r i t i m e S i l k

 Colour-filled shapes shows Belt and Road countries (not exhaustive)

 Bubble size represents the total value of direct and indirect payments sent and received with China FY 2018

 Growth FY 2018 vs FY 2014: • Red bubbles: negative growth • Green bubbles: positive growth • Size of bubble not up to scale

Source: Watch - Powered by SWIFT BI

9 Part I: China on course for internationalisation (continued)

BRI boosting imports and exports Yi Gang, the Governor of China’s Central Bank, has said that China is willing to work The Chinese General Customs Administration6 with international organisations, commercial reported that the total value of Chinese lenders and financial centres like Hong Kong imports and exports to countries along the and London, to diversify sources of funding. BRI reached a record-breaking RMB 16.8 Foreign banks, particularly those in Europe trillion in the first three quarters of 2018. That providing significant corporate lending, are represents a 13.2% jump from last year. well positioned to offer finance8. According to SWIFT data, in 2018 Import Letters of credit (LCs) growth was highest Putting the BRI into perspective in the BRI countries of Sri Lanka, Nepal and Indonesia, with the most substantial growth of The BRI may have been developed by China, 23.2% observed in Sri Lanka. but its impact is far-reaching. It has the potential to enhance economic opportunities, Support from financing structures and but there is also a downside in terms of commercial banks regulatory and political complications. In some countries, BRI infrastructure projects have In order to meet the financing requirements been welcomed as a means of facilitating of the BRI, China has taken the lead in trade and creating commercial opportunities establishing large financial platforms, including while, in others, the projects have been the Asian Infrastructure Investment Bank criticised and even aborted. (AIIB) and the Silk Road Fund. More recently, developments in regional debt markets and Asian bond markets have been expedited to improve the Belt & Road financing network system. And, with support from the government, Chinese banks are issuing various credit facilities to help local corporates expand globally.

However, there is a limit on how much China can finance, and there is still a huge funding gap of up to US$500 billion a year7.

6 https://markets.businessinsider.com/news/stocks/chinese-exports-to-B&R-countries-reach-us-9-63-billion-at-124th-canton-fair-1027750176 7 https://www.cnbc.com/2018/04/15/is-chinas-belt-and-road-infrastructure-plan-running-out-of-money.html 8 https://www.scmp.com/news/china/economy/article/2141739/chinas-belt-and-road-infrastructure-development-plan-about-run

10 RMB Tracker

Africa – China’s new Eldorado For its part, China mainly imports natural resources to support its growing population. Xinhua.net says that China is Africa’s biggest These include petroleum products, iron, trading partner. China passed the U.S. in copper and other metals. 2009, and has been the largest for the last nine years. It is also the top investor in the Not only has the value of trade increased, so African market. In recent years, the pace of has the diversity. China has become more that investment has been accelerating. interested in goods coming from Africa, while Africa now imports a significant amount of According to a piece in ‘Big Think’9, while rice from China. Indeed, in places, rice has the U.S. has invested an estimated US$58 become a popular menu item, replacing some billion in the African continent, China’s total local staples. has already reached US$40 billion. Moreover, although Washington announced investment Big continent = big business plans worth US$14 billion during the U.S.- Africa Leaders Summit in 201410 and last year Africa is the world’s second largest continent, (2018), China said it is planning to inject a both by land area and the population of its further US$60 billion10. 54 countries. Of that number, South Africa, Angola and Nigeria – in that order – represent China’s investments mainly take the form China’s three top trading partners in Africa, of loans for infrastructure development. For with imports and exports collectively worth example, in Senegal, highways, industrial over US$10 billion in 2017 (when you include parks, and other infrastructure projects are Egypt). According to China’s Ministry of being funded by a Chinese loan of US$1.6 Commerce (MOFCOM), the value of Chinese billion11. trade with these three countries increased by 12%, 45% and 30% respectively year-on-year. Imports and exports South Africa has a huge appetite for electrical goods, machinery and vehicles. Even small The most developed commercial relationship items, such as cell phones and laptops are between Africa and China is the import/ in demand, especially in urban areas, as is export trade. Estimates vary, but many experts apparel of all kinds. believe that trade between China and Africa has grown by approximately 30% a year over China is also the biggest destination for the last 10 years. It is fuelled by a steady South African goods, with more than 10% influx of Chinese-made goods – especially of total exports heading east each year. That electronics, communication equipment, and is well ahead of South Africa’s next most vehicles – which are badly needed in most important trading partner – the U.S. – which countries across the continent. accounts for a little over 5.7% of South African exports12.

9 Big Think - 12 Aug 2018 – How China is transforming Africa into the next ‘factory of the world’ https://bigthink.com/matt-davis/chinas-growing-influence-in-africa 9 AFP report in Industry Week – 05 Aug 2014 – US Companies to Invest $14 Billion in Africa https://www.industryweek.com/global-economy/us-companies-invest-14-billion-africa 10 Investopedia - 14 Oct 2018 – ‘The 3 Reasons Why Chinese Invest in Africa’ https://www.investopedia.com/articles/active-trading/081315/3-reasons-why-chinese-invest-africa.asp 11 Le Quotidien – 24 Mar 208 - https://www.lequotidien.sn/cooperation-bilaterale-la-chine-a-investi-55-milliards-cfa-au- 12 Trading Economics – March 2019 - https://tradingeconomics.com/south-africa/exports 11 Part II: SWIFT supporting RMB internationalisation

Angola is China’s next biggest import/export currencies used for commercial China-to- trade partner in Africa. However, Chinese Africa transactions in Q1 2019 increased by exports to Angola have decreased slightly in 67.05% compared with Q1 2019, the amount recent years. Nigeria is in third place. of RMB in the mix increased by 53.48%.

Seeing is believing RMB payments from Africa-to-China are also growing rapidly. Analysis of SWIFT The scale of the Sino/African relationship transactions for Q1 2019 shows that the can be seen clearly in the way commercial total across all currencies enjoyed healthy payment volumes have developed over growth of 27.76%. During the same period, time. Although volumes – both incoming and the proportion of RMB used for payments outgoing – started out quite low, the totals are increased by an eye-opening 123.01%. increasing steadily.

Africa’s appetite for the RMB appears to be increasing. While the total amount of all

Commercial payments from Africa ending in China Live and delivered, international MT 103 sent from Africa Traf c sent from Africa (all currencies) Traf c sent from Africa (in RMB)

250 3,000

Thousands 200 2,500

2,000 150

1,500 100 +27.76% +123.01% Growth of Traf c 1,000 Growth of Traf c Q1 2019 vs Q1 2016 Q1 2019 vs Q1 2016 50 500

0 0 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019

Source: Watch - Powered by SWIFT BI

Commercial payments ending in Africa from China Live and delivered, international MT 103 sent from China

Traf c sent from China (all currencies) Traf c sent from China (in RMB)

25,000 120

20,000 100 +53.48% Growth of Traf c Q1 2019 vs Q1 2016 80 15,000

60 10,000 +67.05% Growth of Traf c 40 Q1 2019 vs Q1 2016 5,000 20

0 0 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019

Source: Watch - Powered by SWIFT BI

Source: Watch - Powered by SWIFT BI RMB Tracker

Some still consider the RMB to be more In April 2019, 2,543 financial institutions used difficult to use than other currencies . While the RMB for worldwide payments: that might have been true once, the RMB landscape has matured significantly in recent • 1,671 of them involved China or years. This is creating more opportunities and Hong Kong in making international increasing the RMB’s role as the preferred RMB payments, representing an 18% currency for Chinese companies. increase compared to April 2016. (These institutions are profiled in the chart below); SWIFT has seen RMB adoption across • Over 872 banks used the Chinese financial institutions continue to grow globally, currency for payments without involving with the number of banks using the currency China or Hong Kong. for payments increasing steadily over the last three years.

Number of financial institutions using RMB for payments with Hong Kong and China Live and delivered, international payments sent and received directly with China and Hong Kong April YTD 2019 vs April YTD 2016

+18%

1,671

1,416 +27%

881

+5% 693 467 491

+8% +30% 153 165 134 103

YTD Apr YTD Apr YTD Apr YTD Apr YTD Apr YTD Apr YTD Apr YTD Apr YTD Apr YTD Apr 2016 2019 2016 2019 2016 2019 2016 2019 2016 2019 Share of 31% 45% RMB users 45% 58% 44% 51% 39% 47% 42% 52% Africa - Middle East Asia Paci c Americas Europe World

Source: Watch - Powered by SWIFT BI

13 Part II: SWIFT supporting RMB internationalisation (continued)

2.1. SWIFT global payments innovation In the past few years, Chinese regulators have (gpi) reinforced their commitment to opening up China’s capital markets to foreign investors Through its platform of 11,000 users across by launching several highly successful pilot 200 countries and territories, SWIFT provides programmes associated with overseas the connectivity and reach that financial markets. For instance, Chinese Financial institutions involved in business growing out of Market Infrastructures (FMIs) are providing the BRI need in order to operate securely and cross-market access that leverages the efficiently. ‘Connects’ between the Mainland and Hong Kong, including the Stock Connect Scheme In China, some 430 banks, 41 corporates launched in 2014, and the Bond Connect and 25 other financial institutions are already Scheme launched in 2017. connected to SWIFT. Some of that success is undoubtedly due to the global payments These Connects are innovative frameworks, innovation – more widely known as SWIFT providing cross-market access that leverage gpi – which has set a new standard for global the ‘One-Country-Two-Systems’ relationship business transactions. between Mainland China and Hong Kong’s well-established market infrastructures. They Launched in 2015, SWIFT gpi enables are also aligned with international standards. corporates to enjoy an enhanced payments Further opening-up will be the key theme for service directly from their banks. Key features China’s capital markets in 2019. Chinese FMIs include: are likely to become much more integrated with global capital markets in the following • Same day use of funds ways: • Transparency on fees • End-to-end payments tracking • Further enhancement of existing Mainland • Transfer of rich payment information China-Hong Kong Connect schemes to bring them further into line with global SWIFT gpi was designed to help corporates practice. grow their international business, improve • More direct Connects will likely be supplier relationships and achieve greater established between China Securities treasury efficiencies, thereby addressing the Market Infrastructures (SMIs) and primary challenges of corporates. Payments international SMIs located beyond Hong are processed faster and there is heightened Kong. visibility of incoming payments to facilitate • More domestic links among different treasury management. central Securities Depositories and exchanges to facilitate the development Globally, more than 3,500 banks have of derivatives transactions and collateral joined SWIFT gpi. Over 50% of cross border management. payments on SWIFT are processed through gpi. And, in China, more than 146 banks To achieve the above initiatives, China SMIs groups have joined SWIFT gpi, representing will face challenges in controlling operational 86% of all cross-border payments with China. risk, streamlining processes and managing costs, especially when facing so many 2.2. Chinese Financial Market different infrastructures and market practices. Infrastructures (FMI) – connecting China to the world SWIFT’s view is that the ultimate adoption of ISO standards for clearing and settlement China is investing in long-term international by China’s regulators, clearing houses and and domestic securities market frameworks institutions – and the globally established that support the internationalisation of the market practices that have been developed RMB. around them – would be hugely beneficial. Both for China’s investors establishing a global presence, and for international investors moving into the country.

14 RMB Tracker

2.2.1. Cross-Border Inter-Bank Payments The impact of CIPS has been impressive. It System is making a difference has been credited with contributing to the opening up of China’s capital markets, as One of the biggest hurdles China has faced in well as bringing more product innovation internationalising the RMB has been changing opportunities to the global RMB market. the perception that it is a difficult currency. SWIFT is also helping to make the payment Using the RMB became a lot simpler in 2015 process even simpler, and earlier this year, when the People’s Bank of China launched it signed a letter of intent with CIPS to CIPS – the Cross-Border Inter-Bank Payments deepen cooperation in cross-border payment System – which facilitates RMB clearing and services and support the RMB’s further settlement for mainland Chinese financial internationalisation. institutions and companies conducting cross- border and offshore business.

Overview of the key features of CIPS-facilitated RMB cross-border payments

Features Benefits

Operating hours Covers the majority of RMB payments markets, including Asia, Europe 24 hours and Oceania. The aim is to eventually operate round the clock. (business days only)

Direct and indirect participants The introduction of more participants will lead to greater access for key financial market infrastructures and offshore financial institutions. CIPS’ functions support the expansion of overseas direct participants.

ISO 20022 messaging standard - Reduced operational costs. - Increased straight-through-processing rates (STP) for cross- border RMB payments.

Unique global identifier - Simplified payments processing for overseas banks. - Improved accuracy for cross-border RMB payments and more efficient system processing.

SWIFT gpi-enabled - End-to-end processing of RMB cross-border payments to Chinese beneficiaries. - Faster (same-day) processing. - Transparency in terms of fees. - Real-time tracking capabilities.

15 Part II: SWIFT supporting RMB internationalisation (continued)

2.2.2. Stocks and bonds gaining cooperative operating in 200 countries and The key stages are: momentum territories, with robust governance and • Initiation community engagement models. By ensuring • Onboarding Bond Connect has been gaining momentum that the right problems are solved, SWIFT • Transacting since it was launched in July 2017. It offers the brings value to stakeholders and users • Support/servicing China Interbank Bond Market (CIBM) access of SWIFT – in China or anywhere across • Monitoring to a broader group of international investors. the globe. The portfolio of products and Participants have welcomed the scheme’s services has been designed to cover the Each stage involves different departments streamlined and simplified admission entire transaction value chain within a bank within the bank, including the Front office procedure and other access benefits. – from client initiation to the monitoring of and Due Diligence teams, and each one has currency flows – to minimise the risk of money specific challenges and pain points. The innovations under Bond Connect are laundering. most manifested in the areas of market admission, in terms of pre-trade, price Support/ Initiation On boarding Transacting Monitoring discovery and efficiency in trading, and Servicing in post-trade settlement arrangements. It Time consuming Documentation, paper, Inef ciencies ReconciliatSupport/ion issues Disparate data effectively connects the Mainland bond market Problems CompliInitiationance & Risk checks On (KYC) boardingTraceab Transactingility Operational overhead IdentifyingMonitoring fraud dif cult with international practices, at lower access and Pain Regional disparity Slow Servicing Points Multiples banks involved costs and higher market efficiency. Time consuming Documentation, paper, Inef ciencies Reconciliation issues Disparate data Problems Compliance & Risk checks (KYC) Traceability Operational overhead Identifying fraud dif cult and Pain Regional disparity Slow Stock Connect is a unique collaboration that PointsA set of products and services is availableMultiples for eachbanks stage, involved to minimise risk, facilitate the Support/ represents a significant step in the reform onboarding processInitiation and reduce On manual boarding reconciliation Transacting processes within a bank. Monitoring and liberalisation of China’s capital markets. Servicing Launched in November 2014, today the Time consuming Documentation, paper, Inef ciencies ReconciliatSupport/ion issues Disparate data scheme covers over 2,000 eligible equities in Problems CompliInitiationance & Risk checksOn (KYC) boarding TraceabTransactingility Operational overhead IdentifyingMonitoring fraud dif cult and Pain Regional disparity Slow Servicing Shanghai, Shenzhen and Hong Kong. Points Multiples banks involved Time consuming Documentation, paper, Inef ciencies Reconciliation issues Disparate data By linking the Hong Kong, Shanghai and Problems KYCComp Registryliance & Risk chKYCecksRegistry (KYC) TrSWIFaceabTgpilityi OSWIFperatioTgpnali overhead IdeSanctionsntifying fraud dif cult and Pain Regional disparity Slow screening/testing Shenzhen exchanges, Stock Connect enables Points Adverse Media Connectivity MultiplesInterface bas nks(7.2) involved Integration international and Mainland Chinese investors Compliance SWIFT Traf c Name Screening CSP Program gCASE Analytics KYC Registry KYC Registry SWIFTgpi SWIFTgpi Sanctions to trade securities in each other’s markets, pro le Attestation screening/testing Ref Data Bootcamps Intraday Liquidity using the trading and clearing facilities of their Adverse Media Connectivity Interfaces (7.2) Integration Directory Watch Analytics MonCompitoringliance home exchange. SWIFT Traf c NaRmeeac ScrhPluseening CSPRef Da Prtaogram gCASE Analytics Directory Data Solutions pro le Attestation RefMyStandards Data & BRooeactcampshPlus Intraday Liquidity readiness Correspondent 4.3. Holistic approach helps banks and Directory Watch Analytics Monitoring corporates going global RpoeacrtalhPlus RefSanctions Data Screening, monitoring ListDir decistributiontory and Data Solutions Testing Payment Control MyStandards & ReachPlus readiness Correspondent SWIFT provides a financial and digital Payment Data Quality Gpi Observer portal Sanctions Screening, monitoring infrastructure for the scalable, reliable and List distribution and insights & Payment Control Analytics secure conduct of business and trade across Testing Payment Control BRI markets. It offers extensive connectivity Payment Data Quality Gpi Observer insights & and reach across 11,000 institutions around Payment Control Analytics the world, including 430 in China, and connects corporates, financial institutions and financial market infrastructures. This makes SWIFT a critical enabler of business between China and the rest of the world.

A range of ancillary products and services including business intelligence, financial crime and compliance, reference data and interfacing ensures that financial flows between economies and their institutions are efficient and standardised. Ultimately, SWIFT is a neutral financial industry

16 OMFIF Contribution RMB Tracker

From Adam Cotter I Head of Asia and Chief Representative, OMFIF Singapore

OMFIF, the Official Monetary and Financial Institutions Forum, is an independent think tank for central banking, economic policy and public investment, and constitutes a non-lobbying network for best practice in worldwide public-private sector exchanges. OMFIF presents its views on the role of China in the economic landscape and RMB Internationalisation, as follows.

In an era of trade disputes and rising investment, international trade and the protectionism, tensions between China and movement of large numbers of tourists from the US are having a mixed effect on the global China boosts markets globally. This offers economy. But these pressures are mere China a means by which to internationalise its perturbations for Beijing’s longer-term vision. financial sector and its currency, the renminbi. Chinese President Xi Jinping’s vision for As US President Donald Trump’s China is a ‘two-stage development plan’, a administration bids to curb China’s rise, the perpetuation of the grand strategy of Deng renminbi has been at the centre of much Xiaoping, the country’s former paramount misinformation. But, as US economist and leader. Under Deng’s tenure, China’s strategic OMFIF Advisory Board Member Steve Hanke objective was to become a developed country has put it, the ‘dollar remains king, and when by 2050. Deng’s longer-term vision, which it comes to currencies, kings are hard to became the guiding principle for China’s dethrone.’ economic reform and opening-up policy, was For countries with a high proportion of to be achieved in three stages. economic integration with China, it makes The first was to double GDP in both real sense to use the renminbi. As well as and per capita terms by the late 1980s. The potentially lowering exchange rate risks, second was to double GDP and GDP per China’s central and state-owned banks have capita again by the end of the 20th century. been putting in place the infrastructure to The final stage would be achieved after reduce the cost and difficulty of cross-border another 50 years. renminbi transactions. However, China’s financial system remains far from globalised. Xi’s plan, in which the first stage between 2020-35 builds on China’s modern economy, China retains a relatively closed capital and the second between 2035-50 nurtures account. Until that changes, renminbi China’s influence on the global stage, can internationalisation may be sluggish. There be viewed as a rendering of the final stage of is still insufficient breadth and depth in the Deng’s strategy. Chinese financial market, but the future of its bond market is extraordinarily important Deng and other Chinese leaders have for the global financial system. It has been always emphasised that rapid growth could growing rapidly and plays an increasingly not be achieved without a stable external important role at home and abroad. The international environment. But China’s inclusion of Chinese bonds in global indices unprecedented economic expansion has will be a major milestone for the country’s exerted a powerful gravitational force on the financial market integration. A well-developed world economy. Infrastructure development bond market will also contribute to the has been integral to China’s growth and internationalisation of the renminbi. has a vital role to play in helping stabilise the global economy. China is transferring its China’s relationship with the world is at a development knowledge around the world turning point; the realisation of Deng’s vision through its Belt and Road infrastructure may come sooner than expected. programme. Bolstered by its deep pools of capital, China’s global economic expansion is increasingly built on ports, highways and pipelines, constructing a comprehensive trade network for Chinese goods. Beijing is delivering enormous investments around the world. Outward foreign direct

17 About SWIFT and RMB Support your RMB strategy with FX Performance Insights Internationalisation fact-based insights

Since 2010, SWIFT has actively supported The growing importance of the RMB The FX market is one of the largest in its customers and the financial industry currency and its role in financial markets the world but as a decentralised market regarding RMB internationalisation through is evident. Because of this, financial it is very difficult to compile accurate various publications and reports. Through its institutions and corporates have already amalgamated metrics. There isn’t one Business Intelligence Solutions team, SWIFT started to build their RMB strategy or are “exchange” where every trade is recorded. publishes key adoption statistics in the planning to do so in the near future but At Sibos 2016, SWIFT announced a new RMB Tracker, insights on the implications need more fact-based information to identify FX service that allows its customers to of RMB internationalisation, perspectives where their organisation stands. continuously measure their FX business on RMB clearing and offshore clearing performance and make more informed guidelines, as well as engaging with To support banks’ strategic development, strategic decisions, based on metrics offshore clearing centres and the Chinese SWIFT Business Intelligence provides derived from actual transactions rather than financial community to support the further insights into the use of all currencies, survey-based information internationalisation of the RMB. including the RMB. In order to obtain more granular market information on the –– SWIFT FX Performance Insights SWIFT fully supports global RMB internationalisation of the RMB as well enables you to continuously measure transactions through its global network as a competitive framework, SWIFT has your FX business performance against and messaging services, as well as RMB- developed three solutions: those of your peers, and so make focused value added services. SWIFT more informed strategic decisions, also has strategic collaboration with CIPS, –– The Watch platform, a portfolio of based on metrics derived from actual facilitating more efficient RMB cross border online reporting and analytical tools transactions rather than survey-based payment transactions. that allows banks to access unique information. analysis and insights into their Please visit www.swift.com for more –– This benchmarking service can be correspondent banking business information about RMB Internationalisation customised based on your selected through volume, value and currency or join our new ‘Business Intelligence parameters, such as product group analysis, as well as compare their Transaction Banking’ LinkedIn group. (cash, options), currency, customer performance against the market. segment (Investment managers, –– RMB Market Insights analysis report Corporates, Custodian ‘Insourcers’…) provides fact-based quarterly and region. market analysis using unique data –– The service deliverables are a set of only available from SWIFT Business monthly reports provided in a PDF Intelligence based layout. Individual details on –– Similarly, the customised RMB analysis each of the peers, anonymised except leverages SWIFT’s unique data and for that of the subscriber, are shown in provides crucial peer competition order of ranking for that month. and strategic insights to optimise your business and support your For further information about SWIFT FX decisionmaking. Performance Insights, please visit swift.com or e-mail [email protected] For further information about SWIFT’s Business Intelligence RMB Consulting Services and the full Business Intelligence portfolio, please visit swift.com or e-mail [email protected]

18 About SWIFT Disclaimer

SWIFT is a global member-owned This report is provided for information cooperative and the world’s leading only. If the customer or any third party provider of secure financial messaging decides to take any course of action services. or omission based on this report and/ or any conclusion contained therein, We provide our community with a they shall do so at their own risk and platform for messaging and standards SWIFT shall not be liable for any loss for communicating, and we offer or damage, arising from their acts or products and services to facilitate omissions based on this report and/ access and integration, identification, or any recommendations contained analysis and financial crime compliance. therein. Our messaging platform, products and services connect more than 11,000 banking and securities organisations, market infrastructures and corporate customers in more than 200 countries and territories, enabling them to communicate securely and exchange standardised financial messages in a reliable way.

As their trusted provider, we facilitate global and local financial flows, support trade and commerce all around the world; we relentlessly pursue operational excellence and continually seek ways to lower costs, reduce risks and eliminate operational inefficiencies. Headquartered in Belgium, SWIFT’s international governance and oversight reinforces the neutral, global character of its cooperative structure. SWIFT’s global office network ensures an active presence in all the major financial centres.

For more information, visit www.swift.com.